Usman Khaliq

Poor Economics by Abhijeet Banerjee

7 minutes read

The great debate in the development sector is between the donors and the free market advocates, namely, the people who argue that the developing world needs substantial and constant monetary aid to improve the fortunes of the poor people, and the people who vehemently insist that unfettered, continuous aid has in fact made the problems worse, especially in Africa. Working in Sierra Leone since the past nine months, I can somehow relate to the concerns that the naysayers of the magical power of aid have, namely the fact that a constant supply of aid leads to a systemic corruption of institutions in the receiving country,and with no level of accountability or a great incentive to use the aid being received properly, it leads to corruption trickling down to all levels in the economy. However, simply saying that countries should look at growing their economies by adapting free market principles doesn’t go too far in addressing pressing issues such as poverty alleviation, infant mortality and access to quality healthcare. Rather than taking extreme sides in the debate and finding anecdotal evidences that boost one particular worldview, it is important to break down these large encompassing questions into much smaller queries that can be quantitatively tested. This way, not only can it become easier to identify the specific policies and projects that have worked in different parts of the world, it can also become much more easier to earmark the interventions where aid has run counter-intuitive to the stated goals. Poor Economics, written by Esther Duflo and Abhijit Banerjee from the Abdul Latif Jameel Poverty Action Lab ( J-Pal) at MIT answers these very questions. Rather than taking on a specific ideological position, the book highlights a number of different programs that have been run all over the world in the development sector, and tries to quantitatively showcase which policies have worked and which have not.

The book makes a number of very interesting points which we should consider while deciding on what measures can be used to address some of the most pressing issues that the world faces. For one, we often tend to underestimate just how much information the poor people in developing countries do not know. It is easy and patronising to deride them on why some parents don’t see the benefits of free immunisations for their children or why some farmers cannot figure out the correct amount of fertilisers to use on their fields. However, the reality is that the blame for this misinformation primarily falls on the people devising products meant to alleviate poverty and its many side affects. Without putting in as much thought into deciding on the marketing channels as is put into devising the product itself, it is incorrect to assume that the people that are meant to be targeted by these products would automatically start using them.

A very interesting insight that the book also touched upon was the mere fact that the poor have to make far more decisions in their life as compared to more privileged people like us . For one, we do not have to worry about whether the tap water in our homes or offices needs to be chlorinated, or whether we need to manually add essential nutrients to our cereal and salt consumption. In comparison, these are precisely the type of decisions that we expect the poor to take in the blink of an eye; there are market interventions that target the usage of chlorine tablets in the water to be used in poor people’s homes in South Asia and Africa, while we also expect the poor to be conscious about the kind of food they eat and to take advantage of the rich-in-calories-but-mediocre-tasting food that is offered by a number of NGOs in the developing world, completely ignoring the fact that obesity and heart diseases are growing in much of Europe and the West primarily due to the diet choices that we make. Rather than merely making products available at either zero or very low costs and expecting the poor to immediately change their consumption behaviour, we need to better understand the realities of every individual market, and devise solutions that incentivise the people in the correct manner.

For all the talk that is made about the power of free markets, the fact remains that for a lot of products, either markets do not exist, or if they do exist, then, they have priced out a substantial number of people out of the market completely. For instance, even with the upsurge in the number of micro finance organisations that operate globally, the adaption rates of financial products has been nowhere near the penetration rates that these organisations were expecting. A major reason for this has been the fact that dealing in the small denominations that the poor usually use leads to a substantial amount of overhead cost, which makes it difficult to scale these operations for mass market adaptation. Therefore, there is a need for government intervention in markets where either it is not feasible for the private sector to provide goods to the poor at a low cost, or where the public benefit of the goods outweighs the financial gain to be made by any private player. For some products such as mosquito nets for prevention of malaria, the quantitative results point out that distributing products for free is the best way to maximise the benefits of these interventions.

A major talking point that the opponents of aid often bring up is how the existing institutional structures in much of the developing world are still a relic of the colonialism era, with the privileged class in these countries making a conscious effort to maintain the economic disparity in their countries. While it would be wrong to outrightly say that nobody from the status quo harbours nefarious reasons for keeping the poor people in their existing condition, there is a far simpler reason for the chaos and institutional inefficiency that is witnessed in these countries rather than some elaborate conspiracy theory. This alternate theory is based on the three I’s, namely “ideology”, “ignorance” and “inertia”. The policymakers and planners in most of the developing world, in collaboration with the policy “experts” from the West, often always think about new products and interventions meant to alleviate poverty from the lens of their own specific ideology. While this isn’t wrong in itself, this ideology needs to be stacked up against the ground realities to see how applicable it is. What further expounds this issue is the fact that the majority of these so-called experts are wilfully ignorant about the ground realities, and the inertia that exists in these organisations is such that they are not nimble enough to have a regular monitoring and feedback loop within their workflows that would ensure that their ideas are being constantly monitored and improved upon. Thus, a toxic mixture of the three I’s leads to a severe stagnation in the progress that these well-meaning policy advocates envisioned.

Finally, expectations often end up turning into self-fulfilling prophecies. Numerous studies throughout the book show that if the environment is structured such that the poor have an expectation or are expected by others to not achieve much in life, then,they end up at the lowest rung of the economic ladder. Studies conducted to figure out why the standard of public schools in India is so abysmal have uncovered that it is a dangerous combination of parents expecting their children to change the family’s fortunes dramatically due to education, coupled with the teacher’s low expectations of students that are not naturally gifted that leads to a dangerous trend where although the most naturally gifted students are pushed through, the vast majority of the children fail to advance as much in life as a basic schooling should ensure for them.

Poor Economics is a very interesting read, and highly recommended for anybody either working in markets in the developing world or interested in learning more about the causes and explanations of poverty. It is a book that forces the reader to re evaluate our expectations from other people, and to try to look at the world from the eyes of the people who suffer the most. Only by adapting a deep level of empathy can we truly understand the root causes of poverty and figure out means to solve the problem. The epidemic of systemic poverty is a complex issue that does not have one overbearing solution, but rather, it requires us to break the problem into smaller, tangible targets, and work towards those targets to improve the fortunes of billions of people around the world.